iPhone Shines But iPad Dims

Apple
Inc.
regained some momentum in its fourth quarter, selling more iPhones than expected while triggering some concerns about the iPad.

Apple's fourth-quarter earnings climbed 24%, but results fell short of expectations with a slowdown of iPhone sales and lower-than-expected iPad shipments. MarketWatch's Christopher Noble and Dan Gallagher discuss whether the holiday season could be a blowout for Apple. (Photo: AP)

But the results ratcheted up the pressure on the company for the current holiday quarter. The company is preparing to market a new set of products and is grappling with making enough iPhones.

Apple said it sold 26.9 million iPhones, up 58% from the year-earlier period and above analyst predictions of between 24 million and 26 million. The quarter, which ended Sept. 29, included about a week of sales of Apple's new iPhone 5. Apple sold 14 million iPads, up 26% from last year but below many estimates.

Overall, the company's revenue rose 27% in the quarter ending in September, while profit rose 24%. But the iPhone numbers, slightly higher than analysts were expected, weren't enough for investors to cheer. Also weighing on them: lower-than-expected iPad sales and concerns about the company's profit margins. Apple issued revenue guidance for the quarter ending in December of $52 billion, about $3 billion below analysts' expectations.

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Apple shares were flat at $609 in after-hours trading Thursday on the
Nasdaq Stock Market
.
The company's shares have retreated from their high of $705.07 amid questions about iPhone supply.

The results leave investors and analysts looking to the holiday quarter for more clarity about whether Apple can keep up its streak. Apple Chief Executive
Tim Cook
attributed the lower-than-expected iPad sales to consumers waiting for the iPad Mini, which was widely rumored.

"There are no secrets anymore at Apple," said
Brian Marshall,
an analyst at ISI Group, who also said consumers appeared to have been holding back iPad purchases during the quarter.

While new questions emergedaround the iPad, the iPhone remains Apple's most critical and closely watched product. Apple hopes the iPhone 5 will help it reclaim the No. 1 spot in smartphone sales from
Samsung Electronics
Co.

ENLARGE

Mr. Cook said on a call with analysts that demand for the new iPhone is extremely robust. "We are in a significant state of backlog right now," he said, adding that the company's output has "improved significantly since earlier this month."

The five-year-old iPhone remains the engine of growth for the company, representing 47.6% of sales in the quarter. The device also has broader strategic significance. Apple relies on iPhone users' loyalty to drive sales of iPads and Macs.

But one of the wild cards for the coming quarter will be the success of the iPad Mini, which was announced on Tuesday and goes on sale next week. Apple also unveiled a new full-size iPad, a new MacBook Pro and a new iMac.

Amazon.com
Inc.,
Samsung Electronics Co., and
Google
Inc.
offer cheaper tablets just a little smaller than the iPad Mini. But analysts predict there are a sizable number of consumers who want an iPad but were unwilling to pay the larger model's $499 starting price.

Analysts say the company could sell 10 million or so iPad Minis by the end of the year, if they can make enough. Analysts have blamed supply-chain problems for lower-than-expected initial iPhone 5 sales of five million in the opening weekend.

Another big question for the current quarter is how Apple's plans to introduce both a new iPad Mini and a new full-size iPad in the current quarter may affect its margins. The iPad Mini's gross margins are 24% and below roughly 30% for current iPad and iPod Touch, according to Sanford Bernstein.

ENLARGE

A customer takes a look at Apple's iPhone 5.
European Pressphoto Agency

Mr. Cook acknowledged on the call that it is unusual for the company to have so many products moving at once. "This is the most prolific period in our history in terms of new product introduction and innovation," he said.

He expressed little concern when asked about competitors, as usual. Mr. Cook described
Microsoft
Corp.'s
Surface tablet, which goes on sale Friday, as "a fairly compromised, confusing product" that aims to do too much. "I suppose you could design a car that flies and floats, but I don't think it would do all of those things very well."

Apple said it sold 4.9 million Macs in the quarter, up 1% from the same quarter last year. The declines in sales of iPod music players continued. The company sold 5.3 million iPods, down 19% from the year-ago quarter. International sales represented 60% of sales, compared with 62% in the company's third quarter.

Overall, Apple said net income for the quarter ended Sept. 29 came to $8.22 billion, or $8.67 a share, up from $6.62 billion, or $7.05 a share, a year earlier. Revenue rose to $35.97 billion from $28.27 billion. In July, the company forecast earnings of $7.65 a share on revenue of about $34 billion. Analysts most recently projected $8.75 a share and $35.8 billion, respectively.

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